Family businesses are built either one of two ways – as a lifestyle business or as an enterprise business. Neither type is right or wrong, but the choice will affect the legacy and generational wealth of the business.
Lifestyle businesses are basically designed to create and sustain a particular level of income for the founders or owners, and not much more. The purpose is to facilitate a particular lifestyle.
Don’t get me wrong. These types of businesses can be very successful. However, they are self-limiting in their ability to expand and transition, because they rely on the owner, the loss of whom stops the business in its tracks.
An enterprise business is a scalable business. These businesses have the potential to move beyond the founders or current generation of ownership because they are not constrained by the limitations of any single individual.
The No. 1 attribute a family business must have in order to have any shot at transitioning to the next generation is transferability. It is driven by three factors: the leadership team; systems and processes; and family business governance.
The leadership team. No company can outgrow its leadership team. Period. They are the ceiling for growth. They either need to get smarter and better, or bring in new people to raise the bar, or the company will stall.
An effective leadership team also helps drive business value in that they reduce the ‘hub and spoke’ condition of so many family businesses – the owner is the hub and everything needs to go through him or her. This is not a transferable business, because when the owner (hub) is gone, so is the business.
Systems and processes. In order to transcend the owner, an organization must have practices and procedures that allow actions to reoccur without ongoing direct supervision, especially from the owner.
This does not eliminate the need for leadership. But instead of leaders being stuck in the trenches, they are keeping their eyes on the horizon, looking for new opportunities, developing their people and ensuring the company remains relevant in customer’s eyes.
Often, the defining characteristic of a scalable company is the ability to replicate or create multiple copies of a similar product or service without substantive modification, versus “one-of-a-kind” items. This leads to decreasing marginal costs where, as production increases, the resources needed to make the next item or provide the next increment of service go down. Businesses with good margins are more transferable.
Governance. Family business governance provides the structure to educate and facilitate communication between family members. It is a platform to discuss succession, family hiring practices (do you get in because of your last name, or do you have to be competent?), education and work requirements prior to joining the family business, business finances, family wealth, etc. Families that do this well have a much greater chance to transition to the next generation.
An enterprise family business is where generational wealth is built, business legacies are sustained, and family harmony is achieved.
Tom Garrity is managing partner at Compass Point Consulting LLC in Hanover Township, Northampton County. He can be reached at firstname.lastname@example.org.